Demand to revive soon; expansion on track
We recently met Stylam’s promoter, Jagdish Gupta, MD, and Kishan Nagpal, CFO, during a visit to their manufacturing plant, which is Asia’s largest single location manufacturing facility in Chandigarh. The management senses a revival in export market demand and expects an uptick in domestic demand soon. For exports, it expects Q3FY24 volume to take a hit owing to the war situation in Israel. However, once the Israel situation normalises, Stylam expects strong demand from that region. Laminate raw material cost and realisation have been broadly stable in the last few months. Management is confident the government will levy anti-dumping duty in the next few quarters on low-cost and low-quality acrylic dumping by Chinese/Korean entities. This is expected to act as a key catalyst for boosting sales in this segment. Stylam’s debottlenecking expansion is almost complete, enhancing its revenue potential by ~25% (Capex: INR 300mn). Further, it expects the completion of laminates brownfield expansion, costing INR 1.5bn with a revenue potential of INR 5bn, by the end of Sep-24. We like Stylam for its industry-leading growth (~2x vs industry), robust EBITDA margin (~20%), healthy balance sheet (net cash), and impressive return ratio profile (ROE > 25%). We maintain our BUY rating with an unchanged target price of INR 2,300/sh (22x its Sep’25E consolidated EPS).
▪ Demand expected to pick up, prices to remain stable: Management highlighted domestic laminate market demand is muted, which is expected to pick up soon. It plans to add a dealer network to gain market share, with no big advertisement plan like peers. For exports, it expects Q3FY24 volume will take a hit owing to the war in Israel, one of its key exporting nations. Israel sales are quite weak now. As Israel’s situation normalises, reconstruction demand should accelerate sales. Management is also sensing initial signs of a pick-up in the laminates export market. Due to cost competitiveness (low labour cost in India) and the closing of the laminate manufacturing unit in Europe, it expects India’s laminate exports to remain healthy. On the back of strong client relations, quick service, ethical practices, and aiming for new geographies, it believes it will continue to gain market share in export. It targets to become the No. 1 laminate exporter from India (currently positioned second). It expects to gain market share in the domestic market too. Laminate raw material cost and realisation have been broadly stable in the last few months.
▪ Anti-dumping will be a game changer for acrylic segment: Stylam has invested ~INR 0.5bn in acrylic segment, which has INR 4bn revenue potential (currently operating at ~10% utilisation). Management believes even at this low utilisation, the acrylic segment will break even on EBITDA. Once this segment ramps up, its operating margin will be in line with the laminate segment margin. Management is confident the Government will levy antidumping duty in the next few quarters on low-cost as well as low-quality acrylic dumping by Chinese/Koreans. It will act as a key catalyst in boosting this segment’s sales. It is focusing on acrylic sales in export too. In the absence of clarity on anti-dumping duty, we have modelled the acrylic segment will operate at only 15% capacity utilisation in FY26, implying 46% revenue CAGR from FY23-26 (on a low base). We estimate acrylic segment revenue share for Stylam will increase from 2.2% in FY23 to 4.7% in FY26.
▪ Capex on track: Stylam’s debottlenecking expansion is almost complete, which has increased its revenue potential by ~25% (Capex: INR 300mn). It expects the laminate brownfield expansion, costing INR 1.5bn with INR 5bn revenue potential, to be completed by Sep-24 end. Equipment is ordered for this expansion. This plant will manufacture large-size laminates (currently missing from the product portfolio), mainly catering to the export market. Owing to less competition in these types of laminates, margins are better in this. Stylam laminate revenue potential will increase to INR 18bn after this expansion. It has room for further brownfield expansion at this location.
▪ Valuation and recommendation: We expect strong laminate volume growth in FY25/26 on the back of a pick-up in demand and ramp-up of sales from ongoing brownfield expansion, which will fill the product portfolio gap of large-size laminates. The acrylic segment will grow rapidly on a low base. We expect it to deliver robust 14/14/24/28% volume/revenue/EBITDA/PAT CAGRs from FY23-26. We like Stylam for its industry-leading growth (~2x vs industry) and EBITDA margin (~20%), healthy balance sheet (net cash), and impressive return ratio profile (ROE > 25%). We maintain our BUY rating with an unchanged target price of INR 2,300/sh (22x its Sep’25E consolidated EPS).